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William Niskanen on Climate Policy: Part IV, Why Regulate?

By Robert Bradley Jr. -- June 19, 2018

[Editor note: This continues a series on the climate views of the late William Niskanen from his Fall 1997 symposium essay, “Too Much, Too Soon: Is a Global Warming Treaty a Rush to Judgment?” Last week’s posts were:

Part IV today reprints his section, “What’s the Hurry,” followed by my concluding comment]

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“Since 1990, when [William] Nordhaus endorsed this approach, no substantial information has developed that would make the case for more comprehensive and costly measures such as a carbon tax or emissions permits.”

– William Niskanen, Fall 1997

“[A mandatory] abatement strategy … will prove to be both costly and ineffective…. [A] rush to judgement on the optimal response to the increase in temperature is the greater danger [than adaptation].”

The case for a commitment to early control of greenhouse gas emissions … should be based on a demonstration that the expected rate of return on these measures is higher than on alternative private and public investments. Since the potential benefits of emissions control lag behind the costs of the control measures by decades, this is a very demanding test.

The average real return on private investment in the United States (including taxes) is about 9 percent. The average rate of return on research and development and on education and public health in the poor countries may be over 20 percent. At a 9 percent rate, control measures that cost $1 billion this year must generate annual benefits of about $7 billion within 50 years to meet this test. At a 20 percent rate, such control measures must generate annual benefits of about $1,820 billion within 50 years to meet this test. The most optimistic estimates of the benefits of emissions control fail to meet this test.

If our objective is to improve our own economic well-being, we are much better advised to increase expenditures for research and development and for private investment in the United States. If our objective is to help the people in poorer countries, we are much better advised to help them finance their education and public health, even if most of the potential benefits of emissions controls would later accrue to people in these countries.

Moreover, there is another important payoff to deferring a commitment to emissions controls: We should know a lot more about this issue in the next 10 to 20 years. Klaus Hasselmann, a leading climate modeler at the Max Planck Institute for Meteorology in Hamburg, acknowledges that “The signal is not so much above the noise that you can convince skeptics. It will take another decade or so to work up out of the noise.”

More refined climate models will be complemented by a near doubling of the important sample of satellite measures of the global temperature. In the meantime, someone should also have made more precise estimates of the costs of emissions controls, the costs and effectiveness of alternative means to avoid global warming, and whether the net effects of some warming are likely to be adverse or benign.

Such considerations led William Nordhaus, perhaps the wisest economist to write about the global warming issue, to endorse “. . . three modest steps to slow global warming while avoiding precipitous and ill-designed actions that may later be regretted.” These steps are:

Improve our knowledge about the magnitude, causes, and consequences of global warming

Develop technology that would reduce the greenhouse emissions per unit of output, sequester carbon emissions, and offset emissions by increasing the reflectivity of the atmosphere

Promote “no-regret” policies that are most likely to be worthwhile on other grounds (for example, creating policy to restrain deforestation in the tropics).

Since 1990, when Nordhaus endorsed this approach, no substantial information has developed that would make the case for more comprehensive and costly measures such as a carbon tax or emissions permits.

Comment

Bill Niskanen’s wait-and-see recommendation can still be made today given the uncertainty of the physical science of climate change. But more importantly, net present value (NPV) economics eviscerates the argument for climate activism (as in national, international government intervention) because present certain costs are compared to distant, uncertain benefits.

For the private sector, a “no regrets” policy dictates self-interested CO2 reductions that do not penalize stockholders or other partners of the organization.

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